<Are you not concerned about this scenario or worse that cpq drops even lower than $29.00?>
Andreas: Excellent question. I'm as concerned as anyone who owns the stock today. The downside risk is identical. However, I have a fundamental advantage seen in:
A. When CPQ was at 33, I received 1 1/16 to sell 10 March 32.5 put contracts. At the time of the sale, I had a margin of error from the existing price of 33 to my actual cost of 31 7/16 if and when the stock is put to me.
B. In the meantime, I buy time for CPQ to recover above 32.5 and I earn the interest represented by the 32,500 I will eventually have to pay if CPQ remains under 32.5.
To your point, if CPQ is 29 at March options X day, I will implement a recovery program by selling the April 30 Calls. Depending on what I receive for the Covered Calls, lets say $1, my cost basis is now
30 7/16. However, anyone who purchased CPQ at 33 that day, is now looking at a loss of $4 if CPQ is $29.
As stated in earlier post, by selling any covered calls, I limit my upside recovery. Hence, this is not a strategy for long term investors. (BTW I shorted 10 puts at 32.5 and 10 at 35. I contend that CPQ should be above 35 buy the end of March. If not, I simply sell covered calls when the stock is put to me.)
Mike Gordon. |
